There are a lot of bases to cover in developing an effective and comprehensive succession plan. To help you address all important considerations and contingencies, the HBK Dealership Industry Group developed, "Ten Steps to Effective Succession Planning." This article addresses the seventh step in an effective succession plan, integrating an estate plan into your succession plan.

Step 7: Integrate Succession and Estate Planning

Throughout this series we have emphasized the distinction between ownership and oversight. As an owner considers succession, the distinction becomes critical, particularly when an owner wants to keep the family business in the family but does not have a family member willing or able to run the business.

We’ve seen a lot of this in recent years. Like this one: The dealership founder had not finished high school, but instead had gone to work in a dealership. Over the years he became knowledgeable enough to start his own business, and was granted a manufacturer’s line. His business was a success, and when he retired, his son, who did obtain a high school diploma, succeeded him. He too was successful, growing the business and sending two sons through college, then to law and medical schools respectively. But they are now a lawyer and a doctor, and neither is available to participate in, much less manage the dealership. In this case, the sons could retain ownership of the dealership as long as the management of the dealership is done by someone competent and knowledgeable in dealership operations. There is clearly an overlap between a dealer’s estate plan and succession plan, so they should be done in tandem and recognizing the unique aspects of the dealership business as well as the succession goals of the retiring dealer.

Even where a next generation will take over operation of the dealership, a comprehensive succession plan must include estate planning in order to ensure transfer of the dealer’s wealth in the most tax-efficient manner possible, that is, to minimize estate and gift taxes. It also includes planning to ensure the dealer’s estate has sufficient liquidity to pay taxes and other expenses without forcing the sale of assets, including the dealership.

Estate planning as part of a succession plan involves many of the traditional estate plan techniques; but, many of these traditional techniques are not available to dealers. As opposed to other business owners, generally the dealer must obtain manufacturer approval relative to any ownership transfers. This includes estate planning transfers.

Some of the most frequently implemented techniques used by dealers:

Annual gifting programs – can be used, when the dealer begins succession planning early enough, to transfer a substantial portion of the estate with no transfer tax.

Family limited partnerships – can be used to transfer ownership to a next generation at a discounted value. The dealer retains control of the business so the value of transferred interest in the business is discounted to reflect the economic reality that the next generation cannot control or market the business.

A grantor retained annuity trust (GRAT) – allows the dealer to make large transfers of assets including ownership in the dealership to family members without paying gift taxes. In a GRAT, ownership is transferred into an irrevocable trust in exchange for annual fixed annuity payments based on the value of the business at the time of transfer. Payments are made over a specified period of time, and any remaining value not paid out goes to trust beneficiary along with ownership of the business.

An intentionally defective irrevocable trust (IDIC) – leverages elements of the tax code to take advantage of differences in the way income and estate taxes are treated relative to the trust. This works particularly well for assets that are appreciating, like a growing dealership business. In an IDIC, the dealer, or grantor, transfers ownership to the trust in exchange for income, which is taxed as income. But the assets in the trust are not included in the estate for estate tax purposes.

Self-cancelling installment note (SCIN) – is a technique whereby the dealer sells ownership to a family member or trust in exchange for a promissory note. The note includes a self-cancellation feature. The dealer receives payments while alive, and the note is cancelled upon his or her death.

As a part of your exit strategy, these techniques can accomplish various goals, more than simply reducing transfer taxes. Estate planning is key to ensuring a successful transition of your dealership. However, an estate plan is not a succession plan. An estate plan without succession planning is a recipe for disaster as it only addresses a portion of the financial concerns relative to succession planning – not, for example, issues like retirement, disability or other potential life and business-altering occurrences – and none of non-financial concerns, specifically leadership and management succession, which must be approved by the manufacturer whose products the dealership represents.

Rex Collins is a Principal at HBK CPAs and Consultants. He directs HBK’s National Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at rcollins@hbkcpa.com; or by phone at 317-504-7900.

Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA.

This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies.

Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.